Russia: impacts on the energy market

Russia and Europe’s gas market

In a recent analysis from World Review, Russia’s hold on the European gas market has been commented upon. The EU forms the world’s largest energy importer and Russia is its biggest supplier of oil, gas, uranium and coal. Russia is also the third largest electricity exporter to the EU. The EU is the country’s largest trade partner and accounts for more than 50% of its foreign trade, 45% of its imports and 55% of its exports. The EU receives 88% of Russia’s total oil exports, 70% of its gas and 50% of its coal. In total, 75% of cumulative foreign investments in Russia are from the EU.

During 2010, 13 European countries relied on Russia for more than 80% of their gas consumption and 17 for similar amounts of gas. By 2020, Russia’s gas export capacity to Europe is expected to increase to 250 billion m3/y and 300 billion m3/y by 2030. However, Russia only has contracts for 158 billion m3/y to Europe.

The European recession and the US’s shale revolution have lead to a worldwide gas glut. These, combined with a decline in Russia’s long term contracts have undermined Russia’s traditional business strategies and price models. Russia’s supplies declined in 2011 and Norway overtook Russia as the EU’s largest gas supplier for the first time in 2012. Gas has become a swing fuel to guarantee the base load stability of European countries as a back up to renewables.

Gas fired power plants are struggling to make a profit in Europe and this has decreased the overall European gas demand growth. This has resulted in Gazprom’s European gas customers seeking a gas price decrease and a new price setting mechanism based on sport market gas prices.

Looking towards the future, Russia is likely to have to compete with Azerbaijan’s growing gas exports of 60 billion m3 to the Turkish and European gas markets and new gas supplies from Europe’s own shale sources, America’s LNG exports and new conventional offshore gas resources in Romania, Bulgaria and the Mediterranean sea. Turkmenistan has also expressed interest in exporting gas to Europe.

The EU has also voiced interest in expanding its share in LNG over the next 10 years and diversifying its imports away form Russia. The European Commission is not only concerned about is gas supply security, but increasingly by the rising gas price difference between the US and EU. Between 2005 and 2012, gas prices in the US industry sector reduced, mainly due to the shale revolution, but they rose by 35% during the same period in the EU. A dispute over natural gas prices has forced Gazprom to cut them by an average of 12% in 2012. But only 20% of Gazprom’s gas exports to Europe in 2012 were spot market deals, and the remainder were fixed formulae.

Russia, crude oil and Syria

Russia has said that Syria’s chemical weapons should be put under international control. This has been followed by comments from US Secretary of State John Kerry that Syria would avoid US military intervention if it did relinquish control of such weapons. This agreement between the US and Russia has halted the steady rise in crude oil prices that was being observed before the comments were made. WTI price dropped by 0.8% to US$ 109.70/bbl and Brent by 1.7% to US$ 117.20/bbl.

Syria is not a major producer of crude with a minimal output of 300 000 bpd. However, the country does have a disproportional impact on crude oil process due to the continuing situations in the Middle East and its proximity.